BSkyB rejected a proposal by major shareholder News Corp to buy the rest of the company in a deal that would value BSkyB at 12.3 billion pounds ($19 billion) but said it would recommend a higher offer.

The pay-TV broadcaster's board said the proposal by News Corp to buy the 61 percent of BSkyB it does not already own for 700 pence per share -- a 17 percent premium to Monday's closing price -- undervalued the company.

But it said it would be prepared to recommend an offer of over 800 pence per share. It noted that the June 10 proposal from News Corp, headed by Rupert Murdoch, was not a formal offer and was subject to regulatory and financing pre-conditions.

It is the unanimous view of the Independent Directors that there is a significant gap between the proposal from News Corporation and the value of the company, BSkyB said in a statement on Tuesday.

BSkyB shares leapt 20.7 percent to 725 pence by 8:12 a.m. British time.

BSkyB has reported consistently strong results over the last several quarters, thanks to a loyal and growing customer base attracted by its premium sports and high-definition offerings.

News Corp, owner of the Wall Street Journal, said a deal would improve its geographical diversity and increase the proportion of its revenues that come from direct consumer subscriptions rather than more volatile advertising sales.

The two companies left the door open for friendly talks that could run until February 2012.

Under the terms of the negotiations, News Corp agreed not to trigger a hostile approach by buying additional shares in BSkyB until two months after a deal receives regulatory clearance or after the end of 2011.

Should it want to break the terms, it would have to pay a fee of 38.5 million pounds.

The companies have agreed that a deal would have to be approved by shareholders holding 70 percent of BSkyB's stock.

BSKyB is being advised by Morgan Stanley and UBS, while News Corp is advised by Deutsche Bank and J.P. Morgan Cazenove.

(Reporting by Georgina Prodhan and Paul Sandle; editing by Paul Hoskins)

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